Richard Green is a professor in the Sol Price School of Public Policy and the Marshall School of Business at the University of Southern California.
This blog will feature commentary on the current state of housing, commercial real estate, mortgage finance, and urban development around the world. It may also at times have ruminations about graduate business education.

Wednesday, August 30, 2017

Tony Yezer on Tax Avoidance and Incidence

He writes:

"I teach this in urban economics. However, in this case there is a 4.5% CAP rate (note that is operating revenue net of operating cost including taxes, insurance, etc) and 4% appreciation per year for 8.5% before taxes. Pretty sweet. If this asset is so tax-preferred, then how is this possible? Why don't capital markets arbitrage this away? Why doesn't the tax expenditure to to the renters. In urban economics class we learn that the tax expenditure goes to the renters to offset the owner tax expenditure. So the 8.5% never materializes. What does happen is that we all (owners and renters) consume more housing space because that is the primary determinant of greenhouse gas emissions by households and we want to maximize those emissions..... Note that the household emissions arise BOTH because the units are larger and contain more stuff AND because commuting distances are longer in less dense cities due to the policy. I have a JUE paper about all this. This is not new and it is obvious. The problem is that no one cares about the incidence of taxes. I bet that fewer than 2% of the American people know that the corporate income tax falls largely on workers in America. A society ignorant of the difference between statutory and economic incidence of taxes is likely to make very poor and perverse decisions.

The most important idea that I include in principles of economics is the difference between statutory and economic incidence. In the case of GW students, it begins with the idea that taxes on liquor are not paid by the saloon owner or the bartender. That gets their attention and then we make some progress."

What Tony writes is true, but it also underlines a problem--how do we judge tax fairness based on economic incidence? That would involve knowing a lot of elasticities that we don't know. If we think fairness is a critical consideration when making tax policy (and I, for one, do), I don't see how we avoid using statutory incidence, if only as a first approximation to economic incidence.